City spent all $7.3 million in 2012 NIZ revenues

Arena authority won't return any money to state budget this year as promised.

January 31, 2013|By Scott Kraus and Matt Assad, Of The Morning Call

Supporters' promises to the contrary, Allentown spent all $7.1 million in state taxes and $180,386 in city taxes collected during the first year of its one-of-a-kind Neighborhood Improvement Zone on the downtown arena project.

That's revenue that would have been deposited into state and city coffers toward everyday expenses such as police salaries and road repairs if the NIZ had not been created.

State lawmakers authorized the zone in 2009 to finance construction of a hockey arena in Allentown. State and city taxes (except property taxes) generated by businesses within its 127-acre footprint are redirected to a fund that can be tapped to finance the arena and spinoff development.

Proponents, including the legislation's author, Sen. Pat Browne, promised last year that the city would not need to tap 2012 NIZ revenues to cover arena expenses. State and city taxes generated within the zone, they said, would be taken from the fund and delivered to state and city coffers in early 2013.

That did not happen.

Instead, the two city authorities overseeing the arena project used all $7.3 million received from the zone in 2012. The money went to retire short-term loans issued by National Penn Bank and secondary lenders to jump-start arena construction.

Browne explained that the Allentown Neighborhood Improvement Zone Development Authority had planned to use a portion of the arena bonds that were supposed to be sold by May to make the National Penn debt payment. But when legal action by suburban communities delayed the arena bond sale until October, ANIZDA decided to use the NIZ tax collection to make the payment — a move allowed under state law.

Browne said the arena construction and surrounding businesses are expected to generate enough new tax money to make the arena debt payments next year, plus repay the 2012 money to the state.

"Given the extraordinary circumstances of the delayed bond, it made sense to use the tax money this one year," Browne said. "Next year's payment will repay the money, and I'm confident that this will be the only year we have to dip into the base tax revenues" that businesses in the zone sent the city and state before the arena project.

The project isn't revenue-neutral now, but it will be in the long term, said ANIZDA board President Seymour Traub. And paying down the short-term loans with cash makes financial sense, he said, because it reduces long-term borrowing costs.

"It stands to reason that the project would start out in the hole because debt is created before the arena opens and a lot of the new tax revenues are created," Traub said.

The $272 million arena complex at Seventh and Hamilton streets has grown to include an eight-story office complex that will house a Lehigh Valley Health Network sports medicine center and a 200-room hotel in addition to the 8,500-seat sports and concert venue.

Across Seventh Street, City Center Investment Corp. is planning an 11-story office tower that will house the headquarters of National Penn Bank and a 200-unit apartment, office and retail complex. Other developers have proposed hundreds of thousands of square feet of new office and retail space nearby and on the Lehigh riverfront.

ANIZDA, at its meeting next week, plans to adopt a resolution promising each year to send the state Department of Revenue any NIZ tax collections that are not needed for debt and to not "overly use" the tax money, Traub said. The resolution is an attempt by the board to reassure the state the board will be frugal in spending the state's tax money.

The $7.1 million in state tax revenue represents a tiny fraction of the state's $26.8 billion budget. The state law that created the NIZ gave the state little oversight of how ANIZDA spends the proceeds.

The combined $7.3 million in state and city taxes generated by the NIZ were paid in 2012 based on businesses' tax liability for the last six months of 2011. The NIZ law took effect in mid-2011.

The revenue was set aside by the state Department of Revenue and transferred in March 2012 to the Allentown Commercial and Industrial Development Authority.

National Penn Bank, in cooperation with Univest Bank and other subordinate lenders, fronted the authority $45 million in 2011 and 2012 to help finance land acquisition and demolition, using NIZ revenues as collateral.

The two arena authorities used the $7.3 million to pay down those loans. ANIZDA sold $234 million in bonds last September, secured by future NIZ revenues, to complete construction and pay off the balance.

With the city facing lawsuits filed by suburban municipalities last spring, Browne tried to reassure suburban municipalities that earned income taxes paid by their residents working in the zone wouldn't be needed in 2012 and would be returned early in 2013.

Browne said debt service payments on the arena construction bonds wouldn't come due until 2013. That turned out to be true, but the city used the $7.3 million to pay off a portion of the shorter-term construction loans before the bonds were issued.

The suburban municipalities had sued to remove their residents' tax dollars from the equation and the legislation was altered in June to limit the local taxes collected by the zone to city taxes, settling the dispute.